Environmental Uncertainty and the Market Pricing of Earnings Smoothness

Posted: 23 Mar 2010

See all articles by Ahsan Habib

Ahsan Habib

Auckland University of Technology

Mahmud Hossain

Nanyang Technological University (NTU) - Division of Accounting

Haiyan Jiang

Macquarie University - Department of Accounting and Corporate Governance; University of Waikato - Management School

Date Written: March 1, 2010

Abstract

Organization’s environmental uncertainty induces greater variability in reported earnings, and accentuates the information asymmetry between managers and outside stakeholders. Managers have the incentives to reduce such variability via income smoothing and hence reduce information asymmetry for firms operating in highly uncertain environment to maximize the stock price. This paper measures income smoothing by the negative correlation of a firm’s change in discretionary accruals with its change in pre-manages earnings as per Tucker and Zarowin (2006). Using future earnings response coefficient (FERC) methodology to measure the informativeness of smoothed earnings, this paper documents that current stock price incorporates more information about future earnings for firms operating in highly uncertain environment proxied by both the coefficient of variation of sales and the dispersion of financial analysts’ earnings forecasts.

Keywords: Environmental uncertainty, income smoothing, future earnings response coefficients

JEL Classification: M43, M40

Suggested Citation

Habib, Ahsan and Hossain, Mahmud and Jiang, Haiyan, Environmental Uncertainty and the Market Pricing of Earnings Smoothness (March 1, 2010). Available at SSRN: https://ssrn.com/abstract=1573158

Ahsan Habib (Contact Author)

Auckland University of Technology ( email )

AUT City Campus
Private Bag 92006
Auckland, Auckland 1142
New Zealand

Mahmud Hossain

Nanyang Technological University (NTU) - Division of Accounting ( email )

Nanyang Business School
Singapore, 639798
SINGAPORE
+ 65 792 4217 (Fax)

Haiyan Jiang

Macquarie University - Department of Accounting and Corporate Governance ( email )

Sydney, NSW 2109
Australia

University of Waikato - Management School ( email )

Hamilton
New Zealand

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